Business/Consumer Services

Amazon earnings surge, but miss Wall Street's forecasts

DanGallagher

SAN FRANCISCO (MarketWatch) -- Amazon.com reported a strong gain in net earnings for the second quarter on Thursday, but the final results missed Wall Street's estimates as the online retail giant stepped up its investments in fulfillment centers and marketing.

The online retailer
AMZN, -0.89%
saw its shares take a big hit in after-hours trading -- falling by nearly 13% -- following the results. The company's operating margin forecast for the third quarter also came in below expectations, as Amazon plans to spend more on its infrastructure to deal with its growing business.

"Fulfillment expenses were higher than we expected, which is a reversal of recent trends Amazon has demonstrated in terms of operating efficiency," said Colin Sebastian of Lazard Capital Markets.

Amazon said it earned $207 million, or 45 cents a share, for the period ended June 30. The company earned $142 million, or 32 cents a share, for the same period last year.

Revenue grew 41% to $6.57 billion.

Analysts were looking for earnings of 53 cents a share on revenue of $6.5 billion, according to consensus forecasts from FactSet Research.

Operating income jumped 71% to $270 million. Analysts had been looking for about $320 million for the quarter. The company said free cash flow for the period increased 29% to $1.99 billion.

Fulfillment costs jumped 42% to $582 million for the quarter compared to last year's June period. Marketing costs jumped by 64% to $211 million.

"The margin expectations were getting a little high," said Tim Boyd of MKM Partners, who called the late stock reaction "a little ridiculous." He blamed the earnings miss on the company investing in its growth.

In a conference call with analysts, Amazon CFO Tom Szkutak said the company was growing "very, very fast," with plans to open 13 new fulfillment centers this year. Some of the investment in those centers took place in the second quarter, including the hiring of approximately 2,200 employees -- most of whom are working in the company's operations, Szkutak said.

Sales of electronics and other general merchandise overtook media sales in the second quarter compared to the same period last year. So-called EGM sales totaled $3.49 billion for the quarter while media sales totaled $2.87 billion.

For the third quarter, Amazon predicted revenue to come in the range of $6.9 billion to $7.6 billion. Analysts had been looking for $7.16 billion for the quarter.

Operating income is expected to come in between $210 million and $310 million, implying a margin range of 3% to 4%. Analysts had been expecting operating earnings of nearly $361 million, implying a margin of 5%.

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